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Nigeria Securities Market: Prof Uwaleke Advises Portfolio Diversification To Mitigate Risk As Election Year Approaches

Professor of Capital Market, Uche Uwaleke

A capital market expert has asked investors to consider long term in their investment decisions in the remaining months leading to the 2023 election as he predicts a stormy weather in Nigeria’s fixed income and equities segment of the market.

Former Commissioner for Finance in Imo State and currently Professor of Capital Market at the Nasarawa State University Keffi, Uche Uwaleke, gave the advice at the July 2022 monthly forum of the Finance Correspondents Association of Nigeria (FICAN) in Lagos on Monday.

Speaking as a guest lecturer at the forum with the theme: “impact of electioneering on fixed income and equity markets in Nigeria”, Prof Uwaleke said the second half of the year leading to election year in Nigeria is often characterized by tension and uncertainties with adverse consequences for the economy and the equities market in particular.

“The second half (H2) of penultimate election year is not for risk-averse investors as recent evidence from the stock market supports “a buy-in-Sept-Sell in January strategy, {ceteris paribus) all things being equal.

“The next six months according to the financial economist, would be characterized by rising inflation rate as the impact of the Central Bank of Nigeria’s (CBN’s) tight monetary policy will not be enough to tame inflationary pressure.

“H2 2022 will also witness rising Exchange Rates due in part to exit of foreign investors as well as increased demand for forex by Politicians as well as rising yields in the fixed income market.

“Indeed, the Debt Management Office (DMO) third quarter Calendar shows bonds to be sold at coupon rates of between 12.5per cent and 13.5per cent.

”Investors are advised to take a longer term perspective as H2 of pre-election year is a good time to identify and take positions in undervalued stocks especially in dividend aristocrats.” He said.

Professor Uwaleke further predicted that there will be Portfolio rebalancing away from equities to fixed income securities, even as the period has been associated with the exit of foreign investors.

His words: “Domestic Investors’ sentiment is usually weak as they seek to reduce their market exposure when elections draw closer. The intensity of the impact is usually a function of the degree of political tension and uncertainty generated by political activities

“While the ASI depreciated in September for all penultimate election years, it appreciated in January for all election years except 2015.

“The outlier, January 2015, was the election year that ushered in the present administration characterized by high tension and uncertainty, compounded by the fall in international crude oil price and the rumoured break-up prediction of Nigeria in 2015 by the United States National Intelligence Council.”

According the capital market expert, the bearish run experienced in the stock market in H2 of 2014 (largely on account of the tension) dovetailed into January 2015.

“To identify mis-priced stocks, the application of ‘Tobin-Q’ or ‘Kaldor’s V’ and Price/Earnings ratios is advised.

“Ultimately, the best strategy to shield the headwinds is to stay with securities that have solid fundamentals as well as ensure a well-diversified portfolio of investments particularly during electioneering periods,” he counseled.

Citing his earlier article titled, “Crystal-Gazing the Nigerian Stock Market in 2022,” Uwaleke said the tight monetary policy intended to rein in inflation would lead to higher fixed income yields and make equities investment less attractive.

“To overcome the headwinds that characterize H2 investment climate, investors in the Nigerian stock market will be well advised to follow the time-honoured cautious investment path of asset allocation, risk management and portfolio diversification.”

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